Tech shares fuel 3rd straight day of market gains

Investors looking beyond earnings

The New Year rally continued Friday, as investors poured more money into technology stocks and looked beyond Corporate America's coming reports of wretched fourth-quarter earnings.

Blue-chip stocks, particularly in the tech sector, have surged over the past three months as investors tried to get ahead of an anticipated recovery this year in corporate profits and the broader economy.

On Friday, stocks extended their gains from the traditional Santa Claus rally period, with the Dow Jones industrial average climbing 87.60, or nearly 1 percent, to 10,259.74.

"Technology has been leading the way," said Alexander Paris, head of Barrington Research Associates, citing a recent rise in the price of computer memory chips as the catalyst for the rally.

On Friday, shares of tech bellwether Intel, which rose nearly 13 percent in the first two sessions of the new year, added another 27 cents, to $35.79. IBM climbed $1.94, to $125.60; Oracle rose 16 cents, to $15.45; and EMC rose 26 cents, to $16.85.

With little economic news on the horizon next week, investors may be looking ahead to fourth-quarter results, which start to roll out in earnest the following week. Or they may already be looking beyond them.

Paris said the results will be as bad as expected, or perhaps worse.

"Most people are ignoring the fourth quarter, and it's going to be terrible," Paris said. "But people don't care--they are looking at 2002."

Over the past two years, even as the Nasdaq market swooned and many technology firms' profits evaporated, tech stocks have usually outperformed the broader market during the peak of earnings reporting season. For the fourth quarter, analysts are expecting tech sector profits to fall by roughly two-thirds, according to Thomson Financial/First Call; key indications of overall results will come from reports from Intel, Microsoft and Sun Microsystems in the week of Jan. 13.

If stocks continue last year's trend of climbing during earnings reporting season, that would bode well for results in January, typically one of the market's best months.

Two factors tend to help the stock market in January: People who receive bonuses at the end of the year often invest the money in equities, and individuals who sold stock late in the previous year to capture a tax loss may want to reinvest the money in the new year.

Two other factors are at work now, analysts said: The Federal Reserve has dropped interest rates to a four-decade low, and large tax cuts passed by Congress last year are showing up on paychecks, giving people more money to spend and invest.

But something else is influencing the market this month, said John Rogers, chief executive of Ariel Capital Management.

Rogers said some investors who bought technology stocks two years ago at the peak of the bubble and sold last year at a huge loss may be trying to recoup their money. Amazon.com, for example, sold for more than $100 a share just over two years ago. On Friday, it closed at $12.25.

"People are pulled in hoping to make up their losses quickly, and I think that is not going to be a good strategy," Rogers said.

Rogers said the perception that the economy is recovering will overcome any weakness in the corporate earnings reports due soon.

"You are going to find some spectacular declines" in earnings, Rogers said, "but those will be isolated situations. People will say the fourth quarter was the bottom and things are starting to pick up."

The rally has certainly been healthy. In the three trading days this year, the Dow has risen 2.4 percent, while the Nasdaq is up 5.6 percent.

Friday's unemployment report may have encouraged investors. At 5.8 percent, unemployment came in as expected and, by historical standards, remains tolerable.

Although technology has been among the leaders of the rally over the past three months, it is not the only vigorous sector in the market this year.

"Union Pacific is close to a 52-week high today," McDevitt said; shares closed at $60, up $1.32, after coming within 40 cents of its high.

Transportation stocks are typically seen as a leading indicator for the economy, rising in advance of better times.

"If you are going to move a lot of freight, that means the economy is starting to pick up again," McDevitt said.

On the downside, shares of Halliburton hit a 15-year low of $8.60 on Friday before rebounding after the company said it is not contemplating a bankruptcy filing over asbestos claims. But battered shares of Kmart rebounded somewhat, despite a second "sell" rating from a major analyst.

But overall, McDevitt said, the public may be psychologically inclined to better times in 2002 after a sometimes horrifying 2001.

"The American people are basically optimistic," McDevitt said. "We are a nation that always comes back. I think we are on the way back."